Some covenants will allow issuers to access potentially significant dividend capacity even while the issuer is in default. In this ELFA Covenant Tip, we explore the decline of the no default blocker in the Restricted Payments covenant.
This feature is one of a suite of provisions included in recent deals that preserve flexibility under the covenants even when the issuer might be in distress – in this case, owners could access dividend capacity even after the issuer misses a coupon payment.
In a typical Restricted Payments covenant, the issuer must prove it is financially healthy (normally determined by its ability to meet a 2x FCCR), and that it is not in default, nor is an event of default outstanding, prior to accessing the builder basket.
But some bonds will preserve the issuer’s access to this significant source of dividend capacity even following a default, prior to it maturing into an “Event of Default.”
To find out if the builder basket is subject to compliance with the “no default blocker,” check for the words “no default or Event of Default” in the conditions to accessing builder basket capacity, just after the definition of “Restricted Payment” at the start of the covenant.
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